Owing the IRS while under extension: interest and penalties

[Michael Plaks]

I see a lot of confusion on owing the IRS while under extension. Here's how the system works.

1. Extension that you filed on April 15 does give you time to file your taxes until Oct 15. But it does not extend the time to pay. If you file your taxes on Oct 15, and you owe the IRS $10,000 - you will owe interest and late penalty, going back to April 15.

2. How much? Interest + late penalty are roughly 1% per month. So, if you owe $10,000 and pay it on Oct 15, you will accumulate $10,000 x 1% x 6 mths = $600 in interest/penalties.

3. But I've read that extension eliminates late penalties! Yes and no. There are TWO late penalties: late filing and late payment. An extension eliminates the former but not the latter. Without an extension, you would have one more penalty, making it a $3,000 damage instead of $600.

4. Can I prevent this $600? Yes, if you prepaid $10,000 with your extension. If you prepay $10,000 half-way thru, on July 15, then you reduce your damage from $600 to $300. So the sooner you pay, the better.

5. But I do not yet know how much I owe - my taxes are not done! True. You have to estimate, aka guess. If you end up overpaying, you will get the difference back as a refund. If you are still short, at least you reduce interest/penalty accumulation.